What happens to superannuation in the event of bankruptcy?

What happens to superannuation in the event of bankruptcy?

In the challenging event of bankruptcy, your super funds could be off-limits to creditors and may even be used to fund asset purchases. The Bankruptcy Act states that, if a person becomes bankrupt, funds held in a person’s regulated super fund are protected and unavailable to creditors.

In addition, a bankrupt person can withdraw money from their super funds, subject to superannuation regulations, and spend these amounts as they wish. If they acquire an asset such as a house and the major portion of the acquisition cost comes from their super funds, the house is also protected from creditors.

However, there is one major caveat

If a person, prior to becoming bankrupt, makes large, ‘out of character’ contributions to their super funds with money that could be paid to creditors, these payments could be taken back. In certain circumstances, the Bankruptcy Act empowers the trustee to claw back such payments into the bankrupt estate.

The importance of timing

The key point is this: the protection afforded by the Bankruptcy Act to funds held in super funds only commences when the person becomes bankrupt.

Consider this example: an individual, prior to declaring bankruptcy, withdraws money from a super fund and purchases an asset. These funds are not protected and can be taken by the trustee for the benefit of creditors.

A curious case

In discussing this issue, let’s examine a recent case from the Australian Financial Security Authority (AFSA) which has some intriguing facts. The case deals with Ms Kim Britton, aged 60, from Queensland.

According to the AFSA report, here are the facts of the case:

On 12 March 2014, Ms Britton was served a Bankruptcy Notice relating to an unpaid Family Court judgment of $45,000

On 17 March 2014, Ms Britton requested her two superannuation providers to withdraw amounts from her funds.

On 20 March 2014 and 27 March 2014 Ms Britton duly received $25,401.96 and $33,399.06 which she deposited into her bank accounts

On 21 March 2014 and 28 March 2014, Ms Britton made eight cash withdrawals totalling $58,000

On 20 April 2014, Ms Britton became bankrupt on her own petition. She subsequently informed the trustee of her bankrupt estate she had spent the $58,000 on living expenses.

Ms Britton was convicted on two counts of removing property prior to bankruptcy and sentenced to six months imprisonment. However, she was released immediately on a $3,000 good behaviour bond for three years. In passing sentence, the Magistrate took into account the seriousness of the offence and noted the need for deterrence.

In exploring the facts of the case, it seems that, had Ms Britton left the moneys in her two super funds until she became bankrupt, she could have escaped prosecution. This is because the funds would have been protected by the provisions of the Bankruptcy Act. So, once she had become bankrupt, she could have withdrawn the funds and spent them without the threat of punishment.

Given that creditors were not disadvantaged, it is curious why AFSA felt the need to take action against Ms Britton.

We also note the nature of the debt on which the bankruptcy notice was based, related to Family Law Act proceedings possibly involving her former spouse/partner. Ms Britton may have been fearful that she would lose the moneys in her super funds when she became bankrupt and that her former spouse/partner, acting as a creditor, would receive some of these funds. To avoid this event, she withdrew and spent the funds in the three weeks prior to becoming bankrupt.

From our perspective, it seems that when contemplating bankruptcy, Ms Britton either did not seek professional advice concerning the status of her super funds or she received advice from someone who had little or no understanding of the interaction between super and bankruptcy.

Getting help when bankruptcy looms

This somewhat sad tale demonstrates the need to obtain quality professional advice in the event of someone facing or contemplating bankruptcy. dVT Group’s Personal Insolvency team has extensive experience and knowledge on all the facets of the Bankruptcy Act and the potential impact of bankruptcy on a debtor and their creditors.

They can assist creditors and/or their legal representatives who are considering whether or not to take bankruptcy action against a debtor. dVT Group can also help ascertain the steps and costs involved in the process in making the debtor bankrupt and what happens after the debtor is made bankrupt and a trustee is appointed to administer their bankrupt estate.

Special thanks to Bob Cruickshanks for his technical expertise and valuable perspective on this subject.

If you would like to know further in relation to a specific situation, please contact David Solomons on 02 9633 3333, email mail@dvtgroup.com.au or complete ouronline contact form to find out more about how we can help you.

dVT Group is a business advisory firm that specialise in business turnaround, insolvency (both corporate and personal), forensic services and business strategy support.